MF Global was founded in 1870 by a barrel maker named James Man who became a successful supplier of rum to the navy. In 2007 the Man Group came to be MF Global. Commissioned under the aegis of the CFTC it is a full service financial futures third party brokerage firm. In 2010 MF Global reported total assets that matched the GDP of Rhode Island or Vietnam. Former New Jersey Governor John Corzine joined MF Global to man its helm in 2010. The purpose was to move the brokerage firm to becoming a global leader in investment banking. One means of achieving that goal was to begin capitalizing in high yield sovereign debt, in a Goldman Sachs way.
MF Global’s board is comprised of individuals from well-known established Wall Street banking and investment firms. Somehow along the way $1.2 Billion of “segregated” client funds seems to have evaporated like a carney’s cotton candy. On February 2, 2012 former Chief Risk Officer Michael Roseman and current CRO Michael Stockman will appear before the House Financial Services Committee. Congress will hear empty statements for the fourth time as to the whereabouts of $1.2 billion in client funds. The slow disintermediation of funds did not occur overnight. A review of MF Global’s asset reporting revealed that the beginning of the euro bond investments began September 2010. A continued open line of credit with JP Morgan, its biggest creditor, helped in understanding the simplicity of the limitless loan to asset ratio. This is not the first time that the CFTC, in its allowance of self-regulation to the NFA, has failed to guard the interest of the investor.
The financial crisis of 2008 brought to light a secret long kept, that the Commodities Futures Exchange Commission (CFTC) granted unlimited hedging opportunities to a privilege few major banks; and certain market participants. In relaxing this regulation for 119 major banks, it offered them unlimited opportunity to hold as many positions as they choose. Trading limits was limitless so cornering and manipulating certain markets was attainable. President Obama argued that these examples of ambiguities by the CFTC and the absence of clarity are the cause of the price manipulation of oil.
Repeated complaints about the inaction of the CFTC resulted in a bill introduced to congress in 2008 called The Energy Markets Emergency Act of 2008. The body of the bill was composed of language legislating that “the Commodity Futures Trading Commission to utilize all its authority, including its emergency powers, to curb immediately excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that is allegedly causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for commodities.” On July 25, 2008 the Republicans successfully blocked the democrats in passage of the bill.
The stated mission of the CFTC is “to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.” Congress created the CFTC in 1974. Its watchdog agency is the NFA the National Futures Association. Originating in Chicago since its inception it has enjoyed government sanctioned self-regulation. Members of congress authorized the creation of this organization in 1982. It was endowed with the powers to investigate, oversee, and act as mediator and arbitrator in the advent of investor complaints.
Because of the MF Global calamity the NFA recently announced newly elected board members, Ernest Jaffarian and Douglas Bry. Elected to the board as Commodity Pool Operators and Commodity Trading Advisors, CPO and CTA, they immediately released statements to the following; “[NFA] is in a position where it can exert meaningful influence,” Jaffarian adds, “Segregated funds were not protected as they should have been, we need more transparency.”
MF Global’s constructs in wealth building has been used for generations. Even investments in high yielding sovereign debt have traditionally been viewed as investment vehicles of safe harbor. Unfortunately the domino effect of failed economies was never considered. More important the system of checks and balances failed the investors. As a result of the MF Global crisis, our system of government is devising yet another joint committee to meet this month. The CME and NFA announced a meeting attended by the Intercontinental Exchange (ICE), the Kansas City Board of Trade (KCBOT) and the Minneapolis Grain (MGEX). Its aim is to review how to safeguard customer funds under the current auspices of SROs, self-regulatory organizations.
It’s widely thought that Former Governor John Corzine was ill prepared for the complexities of global futures’ trading. Even the need for large numbers of introducing brokers seemed to perplex him. His mission was to build this brokerage firm into a major player in global investment banking.
The proverb in Mathew 7:24 comes to mind, “The wise man built his house upon a rock…the foolish man built his house upon the sand.”
MF Global’s Practices is Like a Foolish Man Who Built his House on Sand
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